Sunday, December 8, 2013

A New Bubble in Virtual Currency?

                 Five day sell off followed by a massive comeback on Friday, Bitcoin prices continue to fluctuate and the positive jobs report. What do these things mean to you and your money?

                Let’s be honest, it has been a tough and painful week, if it was not for the great jobs report that came out Friday morning sending the market up an astounding 173 points, the Dow would have ended down over 218 points for the week. Luckily if you read my article from last week where I suggested buying put options on major retailers you would have ended the week with a profit.

-          Wal-Mart was down 1.24% for the week.

-          Sears was down almost 25% this week

-          J.C Penny was down over 18%.

-          Amazon was down 2.73%

Wise bets against any of the companies above would have yielded immense profits but let’s not talk about what happened last week let’s talk about what’s going to happen next week. This week was obviously a sell off week, and a much needed one at that. The Dow closed up for 8 straight weeks, and I hate to say it needed to cool down. The very positive jobs report on Friday though stopped the selloff in its tracks; un-employment fell to 7% from 7.3%. The economy added 203 thousand jobs in November, blowing past estimates of 183 thousand.

Unfortunately this positive jobs report might be a double edged sword considering that it might cause the Federal Reserve to start tapering its bond buying program in early 2014. The good news is that Wall Street appears to have gotten over its moodiness and forget the fears of an early taper that have plagued the markets since talk of them began.

In my opinion the sooner the Fed begins tapering the better, and hopefully when they do start to taper it might cause a much needed correction in the market. Now I said in one of my last articles, that although the markets might see a sell off as early as January or February next year the companies that will be hit the hardest will be the ones that have seen their stock surge way past the average of the market without growing their revenues in any substantial way, and the companies that currently see their market evaluation out pace their revenue growth.

Such companies are found, mostly in internet, and specifically social media although companies such as Netflix, Tesla and Yahoo are also amongst the companies I figure will be hard hit in a market correction.

Now this might make me sound like a bear but in truth in the long term I am a bull all the way, I have faith that the U.S economy will continue to recover and that after a correction and the popping of several specific bubbles the markets will surge to well beyond their current all-time highs.

What I am really interested in discussing though is the new virtual currency bitcoin. If you do not know what bitcoin is, it is a currency that exists solely in cyber space, in essence bitcoin represents the future of all currencies. With that said though the price of bitcoin went from $10 in January to over $1,200 dollars in December (before falling 20% to786.40 after China announced that its central bank will no longer accept Bitcoin as a source of payment and that it will not insure any transaction made with Bitcoin)

Bitcoin’s massive surge in price is mostly due to speculation, may I remind people that the cause of every financial bubble is over speculation. With that in mind it is easy to call Bitcoin the perfect bubble, comparable to that of tulips in the 1600’s and the Internet bubble in the 1990’s. My major grievance about Bitcoin is that it is not backed by anything! Nothing the currency really doesn’t have any substance to it. This along with the over speculation in Bitcoin makes me want to discourage any people from buying it.

Off course the second I came up with this analysis I started looking for a way to bet against the Bitcoin bubble. Unfortunately my search proved discouraging; in order to bet against bit coin you must convert your money into bitcoin and invest in certain Bitcoin exchanges that are few and far between. In essence if you want to bet against bitcoin you must first invest into it at its current price.

But in the end virtual currency is the future and although I do not think Bitcoin is the currency that will replace all others I do think that in the near future our world’s major currencies such as the Dollar and the Euro will be configured to the same virtual cyber space as Bitcoin exists in now.    

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I will be posting an article every weekend and looking back at the political and economic events of that week, both personally impacting events and suggestions about my opinions on the future of the market

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